Study On The Effect Of The Shanghai-hong Kong Stock Connect Program On The Mainland Stock Market Based On The Perspective Of Stock Return

Shanghai-Hong Kong Stock Connect(SHSC)is a mutual market access program that connects the Shanghai Stock Exchange(SSE)and the Hong Kong Stock Exchange(HKEx).This symbolizes one of the major reforms of China’s stock market in the year of 2014.The stock link between Shanghai and Hong Kong aims to promote the standardization,marketization and internationalization(the likelihood of Chinese shares being included in global benchmark stock indexes),to increase efficiencies for trading in listed companies,and eventually to better serve the real economy for mainland and Hong Kong.On November 25,2016,the China Securities Regulatory Committee(CSRC)and the Securities and Futures Commission(SFC)in Hong Kong made a joint announcement regarding the in-principle approval for Shenzhen and Hong Kong stock market trading connectivity mechanism.It said the stock link program between SZSE and HKEx will be formally launched on December 5,2016.As the stock connect program runs as a laboratory for financial reforms,studying its effect on mainland stock market has not only practical significances,but also important reference value for the policy making and henceforth financial reform.Therefore,from the perspective of stock return,this paper studies the effect of Shanghai-Hong Kong Stock Connect program on the mainland stock market in detail.Based on the limited attention theory,over-reaction and under-reaction theory and the efficient market hypothesis,the paper analyzes the way how Shanghai-Hong Kong Stock Connect program influences the stock market.Theoretical analysis shows that the announcement can directly affect,but can influence return of shares by affecting the investor behaviors,and in turn,exerts impacts on the whole stock market.Based on theoretical analysis,we discuss the announcement effect from empirical studies of the short-term effects,long-term effects and impact on the distribution of stock return.Firstly,we select all of the constituent stocks Shanghai stock connect covers as the sample,use daily data from November 12,2014 to November 20,2014(seven trading days),and look into the short-term effects by event study method.The empirical results show that the program has significant effects on the mainland stock market in the short term.Dividing the event period into three sectors-before,during and after the event day,we find that the stock market usually reacts ahead of event day;the impact peaks during event day(AAR reaches the apex when t=0);and after event day,the cumulative abnormal returns increase while growth rate falls,with the short-term impact gradually weakening.Overall,the effects of stock connect is a process evolving from weak ones to significant and gradually be dampened.Subsequently,we filtered constituent stocks from Shanghai stock connect and SSE A shares as the research sample,use daily data from May 15,2014 to May 15,2015,and research the long-term effects by difference-in-difference method.The study suggests that stock return significantly increased 0.16 percent on average a month after the announcement of the launch of stock connect and climbed 0.2 percent in the following two months.The stock connect influenced stock prices within several months according the results of study,having a profound and lasting impact on the mainland stock market.Meanwhile,this study,together with the empirical results of short-term effects,confirms that the magnitude of its effects on mainland stock market will continue to weaken over time,Finally,we further examine the link’s impacts on standard deviation,kurtosis and skewness of the return of shares by using difference-in-difference method.The empirical results show that the program increases significantly the standard deviation and aggravates the volatility of the stock market.However,it makes no difference in kurtosis and will not cause dramatical plunge to the market.Furthermore,the extent of its effects on skewness varies over time.It leads to a significantly increased skewness and also a rapidly rising stock market within two months after the enforcement of the program.But two months later,the skewness decreases significantly while the rising trend of stock market moderates.In a word,Shanghai-Hong Kong Stock Connect program is a profitable program that can attract a large amount of capital moving into the mainland market,promoting the stock market to rise.On the other hand,it does not necessarily benefit to the healthy development of stock market for in the long term since it also can theoretically aggravate the volatility of the stock market.Accordingly,we suggest an extension of the underlying stocks and a limit of Shanghai-Hong Kong Stock Connect,and actively carry out Shenzhen-Hong Kong Stock Connect program.At the same time,we appeal the establishment of investor risk alarm system to fully protect investors’ rights and legitimate interests,and the foundation of investor investment education,actively guiding investor to make investment rationally.Moreover,the launch of SHSC requires the establishment of a joint control platform supervising both the mainland stock market and Hong Kong stock market and the enforcement of enduring regulative mechanism to maintain the smooth functioning of stock connect and prevent systemic financial risk.Last but not least,the implement the delisting mechanisms and the market mechanism of selection promoting the healthy development of the listed companies are urgently needed.